Bluff Your Way in Finance.docx

Bluff Your Way in Finance.docx

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BluffYourWayinFinance

BluffYourWayinFinance

Contents

Introduction

TheStockExchange

TheMarket

Market-makers

Brokers

OtherAnimals

Investment

Securities

Options

JudgingaShare

Timing

Dealing

Takeovers

BidJargon

SomeMoreJargons

WorldStockMarkets

Tokyo

NewYork

Europe

Others

OtherMarkets

LIFFE

MoneyMarkets

Commodities

FinancialRegulation

TheBankofEngland

TheFinancialServicesAct

ThePanel

TheEuropeanUnion

LastRefuge

INTRODUCTION

Financeisajungleinwhichevenexperthuntersaremauledoreaten.Amateursstandlittlechanceunlesstheyarmthemselveswithafewweapons.ProdpeopleintheCitywiththerightphrasesandtheymaybelieveyouaretoowellarmedtobeconsumed.

Thenoviceneedstolearnjustenoughtorealizewhenthereiswoolinfrontofhiseyes,andtoaskquestionsthatwillkeeptheexpertsfeelingtheyarebeingwatched.Forinstance,ifyouaskadviceaboutwhichsharestobuyyouareliabletomeetcondescensionandthesuggestionthatunittrustsmaybethewisestmoveforthesmallinvestor.Atthispointadisingenuouslittlebluffcanwarnthemtobeabitmorecareful–somethinglikeaskingwhethertheP/Eistoolowforthesectorbuttheyieldbelowtheopportunitycost.Thatmaystopthempatronizingyou.

Ontheotherhandifyouaskwhethersuggestedinvestmentsprovideareturnwithanadequatenetpresentvalue,andwhatdiscountratehasbeenusedintheDCFcalculationsandwhy,youareliabletoleavemanyafinancialadviserfloundering.

Thisofcourseistheessenceofallbluff:

tohintthatyouknow,buttogettheexpertsufficientlyoffhishometerritorythathecannotbesurewhetheryouaretooknowledgeabletotanglewithortoosharptoberobbed.WithanexpertofRembrandtyousteertheconversationto,say,Velazquez（ifthatiswhatyouknowalittleabout）andhewillbecomeillateaseandwaryofflatlycontradictingyou.Withaneconomistyoudiscussshop-floorworkingpractices.WithCitypeopleyoudiscusseconomicswhileknowingjustenoughnottobecaughtbeforethesubjectischanged.

Youdo,however,havetotakecare;theworldoffinanceisitselffullofpeoplebluffingforaliving,sowatchoutwhentheseploysareusedonyou.Aneffectivecounter-playifyoususpectyouhavemetaprofessionalblufferistoinsistonhisspeakingplainEnglishandexplainingeverytermprecisely.Thisisnotunreasonableforiftheywantyourcashtheleasttheycandoistospeakalanguageyoucanunderstandandnothidebehindvaporousdouble-talk.

If,despitethat,theystillburyyouinjargon,bealert.Theymaybepeddlinganideasoobvious,orsofalse,itsfragilityneedstobewrappedinverbalflufftoprotectit.

Soarmyourselfwithagoodenoughcommandofthevocabularytoknowwhenothersarebluffingandtoprovideammunitionfortheperfectriposte.

Defensivebluffing,especiallyonthestockexchange,istoavoidadvertisingoneselfasasucker.Theaggressivebluffhoweveriscalledfraudandisfrownedonifdetectedandyouarewithinthejurisdiction.IntheCityyoucangetawaywithalotifyouareasmoothunostentatiousoperator.Peoplewilloftenloveyouevenafteryouhavepocketedtheircash.Nottobeoneofthemugsrequiresknowledgeaboutwhathappensandwhy,soawould-beinvestorneedstohaveafirmgraspofthebasicsifonlytoshowthatyouknowthisisnotaveryseriousplaceandthepeopleinitcleverhucksters.

THESTOCKEXCHANGE

Thefirstthingtorememberisthatyoushouldneverallowanyonetofoolyouintothinkingthereissomethingspecialormysteriousaboutthestockmarketoraboutshares.

Banknotesstartedasreceiptsfromrenaissancejewelersandfinanciersforgolddepositedintheirvaults.Thereceiptswerethereforeasgoodasgoldbutcouldbetradedandexchangedmuchmoreeasily.Thestockmarketisalogicalextensionofthis.

Peoplearereluctanttolocktheirinvestmentmoneyintoacompanyforever,sotheyrecoverthecashbysellingthereceipt.This“marketliquidity”makesinvestorseverreadytostumpup,whichinturnmakesiteasierforbusinessestoraisecapital.

Thatatleaseisthecasefortheexchange.Itseemsnottohavenoticedthatbyfarthegreatestportionofcapitalusedbycompaniescomeseitherfromretainedprofitsorfromloans.Andsomecompaniesgotsodisgustedbyconstantscrutinyandcriticismtheyboughtbackthesharestogetridofthequote.

Seekersaftercertaintyorevenpredictabilityarealarmedbythemarket.Aswasverysuccinctlystated:

“Anyonewhothinksthereissafetyinnumbershasn’tlookedatthestockmarketpage.”

Butthereisnothinglikeaquickandeasyprofitwithpracticallynorisk,totapuniversalgreed:

arashofshareoptionsforemployeesplusprivatizationswithsoaringsharepricescreated12-13millionshareholdersinthepasttenyears.Some20%oftheadultpopulationnowownsasharedirectly–quiteapartfromtheoneswhosepensionsandlifeassurancedependonthestockmarket.

Likeexistingshareholderswithalittlemorecashintheirpockets,someofthesenewcapitalistsarenowwonderingifitmightbeworthdabblingasecondtoeinthepiranhapool,butaredeterredbythearroganteffronteryofthejargon,andthehighcommissionschargedbybrokerstryingtorecoverfromthesmallsaverwhattheydarenotchargetheimportantinstitutionalclient.

Theimportantthingtohaveisconfidence,forinfactitisrelativelysimple,andtherearewaysofminimizingcosts.Thebasicprincipleis:

“Takeasmuchasyoucangetandpaynomorethanyoucanhelp.”

TheMarket

Therearetwothingstobearinmind.Firstly,thestockexchangeisnodifferentfromavegetablemarket（norarethebarrowboys）.ItisjustamatteroflearningtheshareequivalentofthedifferencebetweenaCox’sOrangePippinandJerusalemartichoke–thoughitmaytakealongtimebeforeyouspotalemon.

Secondly,themarketneedsyoumorethanyouneedit.Youcanalwaysputyourcashintoabuildingsocietyorasockunderthemattressbutwithoutyourinvestmentmarket-makerswouldhavetoworkforaliving.

Therulesthereforeare:

keepagriponyourimpulsetospend,andbepositive.Stockbrokersarelikeusefulhounds;theyhavetobetrained.Sowillneedtheoccasionalfirmhandtoensurethattheyknowwhoisboss.

Thestockmarketemploysanumberofprofessionals.Whenthedealingwaspersonal,theStockExchangemotto“Dictummeumpactum”（mywordismybond）meantsomething.Notjustbecausemostofthemweregentlemeninthosedays,butbecausedealsworthlargesumsofmoneyweredoneonnomorethanabriefwordandajottedaidememoireintwonotebooks.Nowallisdoneviacomputerandsuchrelianceonenlightenedself-interestisunnecessary.

Market-makers

DrJohnsonwasscornfulofjobbers（themarket-makers’predecessors）as“anunnecessarycollectionoflowfellowswhospeculateintheFundsandareofnobenefittoanyonebutthemselves”.Hemighthavebeenlesscharitableabouttheirsuccessors.

Amarket-makerbuysandsellsonhisownaccountandforhisownprofit.Asaresultheactsasabuffertothesurgesofbuyingandsellingfrominvestors.Whenallthepressureistosell,hemarksdownpricesuntilthesellersaredeterredandotherssmellabargain.Alltheotherwayabout.

Themarket-makerhastwoprices,say,108-112,whichmeanshebuysat108pandsellsat112p.Pricesthatarequotedinthenewspapersrepresenttheaverageofthesetwo,the“middle-marketprice”,justaspublishedcurrencyexchangeratesarethemid-pointofbuyingandsellingprice.

Thedifference（between108pand112p）,knownas“thespread”,paysforhisrisk,hisprofitandhisdailysandwiches.Tosaythemarket-makerhasabigspreadisacommentneitheronhisbellynorthefarmheusesastax-dodge,butacriticismofhismarketgreed.

Itisimportanttorememberthatmarket-makersarethesniff-the-breezetypeofinstinctivedealers.TheyhavelittleideawhatliesbehindnameslikeShellorBarclaysBankanddonotcare.Fromnewspapers,thegossip,andafeelforthewaysmarketsbehaveevenwhenbeingirrational,theysensetheatmosphereandjuggletheirpricesandtheirdealings.

Theyusedtogetveryrichindeedbutcompetition,nervousmarketsandbeingpartoflargeconglomerateshavedentedthebusiness.Marketproblemsofthiskindarethefavoritetopicofconversation.Itwillnotbeoutofplacetoenquirewhethertheremaybetoomanymarket-makers,ortosuggest,inacasualway,thattherehasnotbeenenoughgrowthinturnovertosustainthemall,addingthattherecentwarinessofinvestorscouldensurethedifficultycontinues.Youmightaskwhichmaybethenexttofallover.

Donotexpecttodealwiththemdirect.Market-makershaveproblemsenoughwithouthavingtocopewitheveryeagersmallinvestorringinguptonegotiateeachtransaction,sotheyconfinethemselvestotradingwithbrokers.IfyouaretheBritishRailpensionfundorthePrudentialtheymaydeigntotalktoyoubutifyouhaveunderamillionpoundsinyourpalm,forgetit.

Brokers

Brokersarethemiddlemenwhodothebuyingonyourbehalf.AsDisraelisaid“Itiswellknownwhatamiddlemanis:

heisamanwhobamboozlesonepartyandplunderstheother”.

WhataBrokerDoes

WhenyoutelephoneabrokerheorsheswivelsroundtothecomputerscreenwiththeTopicservice,onwhichtheSEAQpricespagescanbecalledup.Thereisnopointtryingtorememberwhatalltheacronymsstandfor–themarketmenhaven’tgotaclue,sowhyshouldyou.YouneedonlyaskwhetherSEAQisshowingalargevolumeandwhethermarket-makersareraisingtheirlimits.

IfitisapopularcompanylikeMarks&SpencerorICItheremaybeadozeno